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Dow 10,000 and Fed's comments finds selling

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Two benchmarks may have been achieved in today's session. Bulls certainly got their Dow 10,000 early in the session, while the Fed's comments that that the probability of an unwelcome fall in inflation has diminished in recent months may have marked an end to fears of deflation.

And while the Dow Industrials (INDU) 9,923.42 -0.41% finished 41- points lower on the session and gave back 79.70 points from its 10,003.12 morning high, it wasn't Dow 10,000 that saw sellers show up, I think it has to be the Fed's talk that fears of deflation have been put to rest, that triggered this afternoon's selling.

Forgive me if I quote the Dow Industrials in decimal form, but after seeing a Friday's bearish swing trade in the NASDAQ-100 Tracking Stocks (AMEX:QQQ) $34.43 -2.28% get stopped out at the open (stop $35.45) with a session high tick of $34.46, and eventually fall to a session low of $34.35, and well below the bearish target of $34.66, my slight frustration has me quoting things in decimal today.

While the Fed's initial statement is always brief
http://www.federalreserve.gov/boarddocs/press/monetary/2003/20031209/
there's always two sides of thought to just what the Fed is actually saying.

Those that view things more optimistically found the Feds observation that deflation has become less of a risk as a positive (I view this as a positive), where some view the Fed's comment that current policy accommodations can be maintained "for a considerable time" as also being a positive for further stimulus to the U.S. economy (I'm mixed 50/50 on this).

Those that are more cautious, view the Fed's bias toward keeping rates low "for a considerable time" has the Fed saying it is concerned that risks toward a weak economy are still present, thus easy monetary policy is still needed (I'd agree to a point).

Today's market reaction to the FOMC statement is about as divergent, or disagreeing as one could imagine.

Treasuries found selling on the Fed's comments, where I would have to think the selling came from Treasury bond bulls that had been holding Treasuries on thought of deflation still being a larger concern to the Fed. The benchmark 10-year YIELD ($TNX.X) jumped 7.4 basis points to 4.352% in today's session. While a 7.4 basis point move up or down is considered a pretty good move, the 10-year YIELD rose 10.9 basis points from the 02:15 PM mark and final 45-minute of trade.

Aha! With deflation out of the way, and Treasuries seeing a sell response, then inflation must be the more dominant part of the Fed's comments. While the February Gold futures contract (gc04g) $408.90 +0.34 rose $1.40, the AMEX Gold Bugs Index ($HUI.X) 107.83 -2.87% found the equity side of gold seeing some selling.

In an attempt to truly offer an unbiased opinion, the AMEX Gold Bugs (Index ($HUI.X) recently traded a 52-week high on December 2nd and trades above its shorter-term 21-day SMA of 236.63. I'd have to check my index symbols closely if looking at a chart of the broader S&P 500 Index (SPX.X) 1,060.18 -0.85%, which recently traded a 52-week high on December 3rd and trades above its shorter-term 21-day SMA of 1,054.04.

My "unbiased" observation at this point is that gold stocks look very similar (technically) to the broader S&P 500 in recent weeks, and for me, it is difficult to confirm that the rise in gold stocks, or the commodity itself, is spelling doom for the broader markets.

As I tabulate much of today's trade, there was little on the equity side of things that didn't see selling today.

U.S. Market Watch - 12/09/03 Close; FOMC Meeting

A lot of red or lower price action today. Traders and investors are welcomed, and encouraged, to bookmark the above for historical reference and can be referred back to in coming weeks. In RED ARROWS and PINK arrows I've marked some of the more heavily distributed sectors over the past 5 trading sessions, and have also added the last 20-day's % change. BLUE ARROWS depict those sectors that are showing more bullish price action over the past 5-days.

One observation related to gold equities, and the non-weighted AMEX Gold Bugs Index ($HUI.X) 242.22 -3.75% in relation to the U.S. Dollar Index (dx00y) 88.49 -0.29% over the past 20-days is nearly a 4 to 1 type of inverse relation to the dollar. Still, despite dollar weakness today, even gold stocks found selling. For the better part of several months we've noted gold's strength on dollar weakness, but today's selling most likely hints more of blanket, or non-discriminate selling.

The Semiconductor Index (SOX.X), Disk Drive Index (DDX.X) and Airline Index (XAL.X) are down nearly 10% in the past 5-days, where 10% declines are often associated with "corrections." However, it has not been uncommon to see 15% declines in the more volatile technology sectors.

Just as the NASDAQ-100 Index (NDX.X) 1,383.66 -2.42% has been lagging INDU/SPX/OEX strength, or leading weakness in recent weeks, it would be an easy observation that semiconductors have been the likely group of stocks weighing on the NASDAQ-100 Index.

One sector I did think held up surprisingly well was the Dow Transportation Index (TRAN) 2,920.92 -0.29% today, which tries to steady itself above a starting to round lower 21-day SMA of 2,916.12. Sector component breadth was negative with 16 of the 19 components trading lower. Gainers had ALEX +2.88%, BNI +1.5% and CSX +0.05%, while bigger losers were the commercial airliners and NWAC -3.66%, CAL -3.43%, AMR -1.88% and DAL -1.65%.

Aside from the focus given to the Fed's comments, today's biggest story, which did have negative impact on the financials (specifically banks) and the homebuilders was Washington Mutual's (NYSE:WM) $39.97 -8.94% lowering of fiscal 2003 and 2004 guidance, due to a decline in mortgage originations, but also greater competition in mortgage lending and intense competition in the mortgage market. What may be more company specific was WM also noting that results would be hurt by the company's greater emphasis on adjustable-rate mortgages.

While I can't say for certain, what could be happening to WM on the adjustable rate side of things is that prior guidance given, or projected, was based on declining Treasury YIELDS or falling mortgage rates, where if looking at Treasury YIELDS in recent months, they have been rather flat with the 10-year YIELD ranging between 4.0% and 4.6%.

I have not had time to keep up on the Mortgage Banker's Association weekly mortgage statistics lately, but will try to set some time aside late tonight.

Market Snapshot / Internals - 12/09/03 close

Market internals on the advance/decline line were not nearly as strong today as they were yesterday, especially for the NYSE. Still, we see a rather notable lagging for the NASDAQ vs. the NYSE in today's trade. While both the NYSE and NASDAQ recorded a greater number of new 52-week highs in today's session than yesterday's, a greater number of new lows were also found, which has the daily ratios (divide NH by sum of NH + NL) nearly identical to yesterday.

With the NASDAQ showing greater technical weakness at this point, and nearing it recent relative lows of November 21, I want to quickly not tonight's 10-day NASDAQ NH/NL ratio of 95.0%, which would still be in a "bear confirmed" reading for this indicator, but up from its relative low reading of 90% found in late November. I'm make this note of some still bullish leadership as the NASDAQ-100 Index (NDX.X) and its Tracking Stock (AMEX:QQQ) now move into a recent gap higher from the late November relative lows. Often times, traders/investors will look for a stock or index to "fill in" a gap that was created on a chart.

Before we look at the QQQ chart and make note of this gap, lets quickly look at the Pivot Analysis Matrix.

Pivot Analysis Matrix -

The past couple of weeks, I have not been focusing too much on the banks, or the S&P Banks Index (BIX.X) 329.94 -1.43%, as they have been trading bullish, and somewhat in UNISON with the SPX/OEX/INDU as it relates to their raw technicals.

However, my mindset right now is that NDX/QQQ is weakest, SPX/OEX is stronger than NDX/QQQ.

It was my observation that late this summer, it was perhaps the banks that really had the SPX/OEX breaking out of their summer congestion. Now there is some "bad news" in the sector, with today's news out of Washington Mutual (WM).

With the NDX/QQQ leading weakness, not only technically, but in the WEEKLY and MONTHLY pivot matrix (traded WEEKLY S1 before the INDU/SPX/INDU) I think we need to monitor the BIX.X very close right now as tomorrow, it shows THREE correlations for support at the 327-328 level. The reason I think we want to monitor the BIX.X so closely is when we look at the MATRIX, you will see how the BIX actually MIRRORS the NDX/QQQ in the MATRIX.

This may be an important observation, when we consider that financials, account for roughly 28% of the weighting in the SPX/OEX.

You see, I think just as the BIX.X and perhaps the financials helped lead the SPX/OEX out of its summer consolidation to new highs, today's news out of WM is some "bad news" that now provides a very good test for the BIX.X. Is the WM news stock specific, or is it something that brings broader weakness to the financials? Right now I don't have the answer, and I'm not certain anyone does, but with three levels of support showing up near the 327-328 area at the MONTHLY S1 and WEEKLY S2, this is what I would consider to be the lower end of a range, if a late- December rally to cap off a very bullish year is to take place.

Now... with this in mind, lets look quickly at the QQQ, where there isn't a bank in the bunch, but technology weakness is notable, not only technically, but when comparing the NDX/QQQ against the MONTHLY and WEEKLY pivot matrix levels. We're also going to look at that QQQ gap, and even bring in a past and not too long-ago backfilling of a gap in the QQQ.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval Chart

For legal reasons, when I profile a stop, I don't budge from that stop, and it was with some frustration that the QQQ traded a penny above my Monday lowered stop of $35.45, which was also today's (Tuesday) DAILY R1. I (Jeff Bailey) then profiled a very stupid day trade bullish trade at $34.97, stop $34.80, target $35.35 and after slight bounce to $35.07, got stopped out. This bullish trade hints to me that the Q's may not see a rocket type bounce as they did on October 24th, but may try and see a consolidation low around the WEEKLY S2. The trade for any strength at this point would be above $35.10. Believe me, the Q's got pushed lower pretty quick when they came back to challenge that level after I profiled the bullish trade long, and this was 10-minutes after today's FOMC announcement.

S&P 500 Index (SPX.X) Chart - Daily Intervals

There was little program trading activity ahead of the FOMC meeting today. One sell program hit early, just as the INDU crossed above 10,000, but I wouldn't say it was an overly "huge" sell program, as the SPX tended to edge back to its WEEKLY pivot and then make an mid-morning high of 1,068. However, just after the FOMC meeting the SPX bounced above 1,068.61 and "whack" the program premium alerts really got active and when the SPX gave up its WEEKLY Pivot and made a session low at 02:40 PM EST, that was about it for any bullishness. I've tried to envision the BIX.X testing its WEEKLY S2 as the SPX tests its WEEKLY S1. I've also pointed to an approximation of where the QQQ traded in relation to its WEEKLY S2/S1, with thought that QQQ may well trade its WEEKLY S2 tomorrow, as SPX trades WEEKLY S1.

Now, with the BIX.X and financials making up approximately 28% of the SPX, do you sense how the BIX.X's WEEKLY S2 becomes a rather important support level, where if broken to the downside, could then have the SPX further vulnerable to WEEKLY S2? With NDX/QQQ weak, the SPX really lack any type of bullish beta, and if the financial begin to weaken and the SPX loses not only tech bullishness, but financial bullishness, then weakness builds for he SPX/OEX as well.

Dow Industrials Chart - Daily Intervals

As we look at the above charts and build observation of how the major indices traded within the MATRIX, we can also see a similar progression in the Stochastics. The stronger Dow may be vulnerable now to some "relief selling" after trading the 10,000 mark. Stocks turning lower from overbought, and with correlative DAILY S2 at the WEEKLY Pivot (remember, SPX/OEX below their WEEKLY Pivots, NDX/QQQ below their WEEKLY S1) the INDU may be vulnerable minimum to its WEEKLY Pivot.

Jeff Bailey

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